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Is private practice acquisition by a hospital or private equity firm preferred?
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Concern with hospital, private equity acquisition
At the OrthoForum we believe the independent, private practice of orthopedics is the most effective and cost-efficient method to deliver orthopedic patient care.
Unfortunately, once a physician group sells a majority of its ownership to a private equity firm or is acquired by a health system, it will not only lose its independence, but will also lose practical control of the practice. Although it is true that neither private equity nor hospital acquisition will interfere with a physician’s ability to make clinical decisions, the physician group will clearly cede control over financial and strategic decision-making, and will likely lose control over significant operational issues as well, especially with hospital purchases. Fundamentally, the group’s approach to its overall business and culture will change. So, why does that matter?
Most importantly, cost of care will likely increase. In the case of private equity, investment return targets must be met, which means producing greater income. With many orthopedic groups already optimizing ancillaries, private equity is left to rely on increased prices. In hospital arrangements, prices increase, by definition, simply due to the higher fees that hospitals are allowed to charge.
Other concerning problems that can arise from a sale include the quality and style of management, equalizing the financial returns to physicians at varying stages of their careers, limiting the ability to choose future partners and greater pressure to reduce operating costs. Also, the impact on the quality of care is largely unknown.
- For more Information:
- Glenn Sumner is the CEO of The OrthoForum in Knoxville, Tennessee.
Disclosure: Sumner reports he is the CEO of The OrthoForum.
Know the upsides, downsides
I would suggest that acquisition by a hospital or private equity would not be desired by a large number of orthopedic surgeons. If forced to choose one or the other, the pros and cons for deciding are as follows:
Hospital:
Pros – Local management; less financial pressure to perform; and usually paid on a work relative value unit basis, so concern with business operations, payer mix and cash collections is lessened.
Cons – Need permission from corporate headquarters if it is a large health system; purchase price and compensation pressure (relative to private equity) is related to the Anti-Kickback Statute; and historically not good with physician management and patient service so there is risk of loss of patients and C-suite turnover.
Private Equity:
Pros – Higher up-front purchase price (in exchange for future reductions in compensation) due to less federal health care regulatory issues; a promised second transaction when they sell the practice to a different buyer (packaged with the other groups they acquired, so really your first real sell of interest since first transactions were an exchange of future compensation); and cash available to acquire/merge with other practices.
Cons – Compensation reduction and managing that impacts lifestyle; operating with multiple owners over a short time period who are all looking for extraordinary returns and the pressure that comes with producing these returns; and recruiting new physicians who will require compensation that exceeds that of existing physicians because the new physicians did not receive any sale proceeds.
- For more Information:
- Michael J. McCaslin, CPA, is with Somerset CPAs and Advisors in Indianapolis and is an Orthopedics Today Editorial Board Member.
Disclosure: McCaslin reports no relevant financial disclosures.